Phoenix Technologies F1Q09 (Qtr End 12/31/08) Earnings Call Transcript

Phoenix Technologies (PTEC)

F1Q09 Earnings Call

January 27, 2009 8:30 am ET

Executives

Woody Hobbs - President & Chief Executive Officer

Richard Arnold - Chief Operating Officer & Chief Financial Officer

Sanjay Hurry - Investor Relations

Analysts

Rich Kugele - Needham & Co

Nathan Schneiderman - Roth Capital Partners

Joe Maxa - Dougherty & Co.

Eric Martinuzzi - Craig-Hallum

Brian Horey - Aurelian

Steve Basmeets - Sigma Labs Inc

Paul Hill - PMH Capital

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Phoenix Technologies first quarter, fiscal year 2009 earnings conference call on January 27, 2009. Throughout today’s recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)

I will now hand the conference over to Sanjay Hurry. Thank you sir; please go ahead.

Sanjay Hurry

Thank you, Pat. Good morning everyone and thank you for joining us to discuss Phoenix Technology’s first quarter fiscal year 2009 financial and operating results. With me on the call this morning are Woody Hobbs, President and Chief Executive Officer; and Richard Arnold, Chief Operating Officer and Chief Financial Officer.

For the convenience of participants on today’s call, management has posted the quarterly financial summary slide presentation onto the company’s website at www.phoenix.com. These slides contain many of the financial metrics that will be provided during today’s call and provide a reconciliation of differences between GAAP and non-GAAP financial measures that management will talk about today. The slides can be found under the Investor Relations section of the Phoenix website on the Webcasts and Presentations page entitled Phoenix Technologies first quarter fiscal year 2009 conference call slides.

On the call today you will hear various forward-looking statements, including those relating to the company’s products, strategy, businesses and financial goals. Actual outcomes and results may differ materially from the expectations contained in these statements due to a number of risks and uncertainties.

Please refer to the company’s recent SEC filings at the SEC website at www.sec.gov or www.phoenix.com and to the Safe Harbor statement located in our press release distributed earlier this morning for a detailed discussion of these relevant risks and uncertainties. Phoenix Technologies undertakes no responsibility to update any forward-looking statements made on this morning’s call.

The press release distributed this morning that announced the company’s results is also available on the Phoenix website, www.phoenix.com, in the Investor Relations section under the Press Releases tab. Our current report on Form 8-K furnished with respect to our press release is also available on the website under the Investor Relations section.

Before starting the call, I would like to take this opportunity to inform you that management will attend the Thomas Weisel Technology and Telecom Conference on February 9 in San Francisco and Roth Capital’s Annual Growth Stock Conference in Dana Point, California, February 16 through 18. Management will be available for one-on-ones at both conferences. Please contact your sales reps or me for additional information.

With that, I’d like to turn the call over to Rich Arnold, Phoenix Technology’s Chief Operating and Chief Financial Officer. Good morning, Rich.

Richard Arnold

Thank you, Sanjay. Good morning everyone and thanks for joining us today for Phoenix Technology’s first fiscal quarter 2009 financial results conference call. Let me start off by saying that we are reporting financial results for the December quarter of 2008, which coincided with the most dramatic global economic slowdown of any of our lifetimes.

Global spending, both by enterprises and consumers, has been severely curtailed and the impact is clearly evident in the financial performance of all companies not only in the PC supply chain and ecosystem, but across all sectors of the global economy. As recently as four months ago, our core business was effectively throwing off cash at the rate of about $20 million a year that we were using to fund the development of our new products and services and now it is not.

Our revenues for the quarter ended December 31, 2008 were $17.4 million and though this amounted equal to the revenues we posted for the same period in the prior year, it’s almost $5 million below the level we’d anticipated when we prepared our fiscal year 2009 operating plan back in September of 2008.

As we’ll discuss later in this call, this has had a significant impact on our cash flows and we’re cautious to rethink our approach to expense management over the balance of the fiscal year. It is fair to say however, that we’re quite pleased that we are reporting revenues for the quarter that are equal to those we had reported for the same period last year. By way of comparison, Intel has recently reported December quarter revenues that were 23% below their equivalent quarter last year and AMD has reported a decline of 33%.

We attribute our success of maintaining flat revenues even in this difficult time. To the efforts we’ve undertaken over the past two years to reengage key core system customers to move away from legacy fully paid up licenses and to reestablish Phoenix as the market leader in core systems.

It’s our solid market share in the portable segment that has made all this possible. Obviously having planned for revenues at a higher level and having continued spending on our new products in accordance with our original plans, we are reporting a gross bottom-line result than had been originally anticipated.

On a GAAP basis, we posted a net loss for the first quarter of $9.3 million or $0.33 per share. This compares to a GAAP net profit of $2.5 million or $0.09 per diluted share in the same quarter last year. We hit the non-GAAP performance, which excludes the accounting impact for stock-based compensation expense as well as intangibles amortization and restructuring costs. We’re reporting a net loss for the quarter of $5 million or $0.18 a share. This compares to a net profit of $3.7 million or $0.13 per diluted share that we reported for the first fiscal quarter of 2008.

We ended the December quarter with $32.9 million of backlog from VPAs which have not yet been recorded as either revenue or deferred revenue; an approximate 18% decrease over the prior year’s first quarter balance. We also ended the quarter with deferred revenues of $15.1 million, an increase of $3.1 million or approximately 26% from the balance one year ago.

Total order backlog now sits at $48 million, a decline of $4 million year-over-year. We believe that this decline is principally the result of our decision during the first quarter of fiscal year 2008 to enter into a number of agreements lasting for up to a full two years; which meant that a number of these agreements did not require renegotiation during the recently completed quarter. Approximately 72% of our current backlog is expected to be reflected in revenues during fiscal year 2009 with the balance expected in fiscal year 2010.

License revenue for the quarter was $14.5 million as compared to $15.4 million for the same period last year. The decline was the result of cautious spending by our large OEM and ODM customers, particularly in the last month of the quarter. We believe this reflects both reduced end user demand and inventory reductions in the global PC supply chain. Services revenue for the first quarter were $2.4 million, an increase of approximately $0.4 million or 20% from $2 million for the first quarter of December 2008. Subscription fees for the first quarter were $0.4 million.

I mentioned earlier that revenue from new products helped offset declines in revenues from our core system software during the December quarter. While this is indicative of the transformation of the Phoenix into a multi-product, multi-channel business, we will not be providing product level or segment based reporting, until such time as we choose internally to manage one or another of these product lines within stand alone profit centers.

Gross margin for the three months ended December 2008 were $13.8 million, a decline from gross margin of $15.3 million for the same three months of fiscal year 2008. Gross margin percentages also declined to 79.4% from 88.3% in the same quarter last year despite slightly improved gross margin on both license fees and service fee revenues. The decline was therefore principally due to the amortization of purchased intangible assets which relate to the three acquisitions we completed in the second half of fiscal year 2008.

Operating expenses for the first quarter ended December 31, 2008 were $22 million, an increase of 84% from $12 million for the same period in fiscal year 2007. Of the $10 million increase, the majority is attributable to higher compensation expense, the increased use of consultants to support development marketing efforts surrounding our launch of the consumer version of HyperSpace and increased administration and other expenses which resulted mainly from the acquisitions I mentioned earlier.

Headcount at the end of December 2008 was 562 employees, up by 52 from the 510 we employed at the end of September 2008 and up by 216 from the 346 we employed one year earlier.

Turning now to the balance sheet and cash-flow statement, cash and cash equivalent balances were $31.2 million on December 31, 2008 as compared to $37.7 million at the end of the 2008 fiscal year. Cash used in operations during the quarter was $6 million as we spent to support initiatives surrounding our new products.

In addition, the proceeds of from sale of shares through our option and ESPP programs were significantly reduced from prior quarters and we were approximately $0.5 million less that we invested in new fixed assets. Woody will touch on our plans for managing our cash flow later on this call.

Now, a word about financial guidance. The macroeconomic environment is highly volatile and apparently continues to deteriorate. This creates a high degree of uncertainty for at least the balance of the current year. Despite this uncertainty, we are generating significant levels of traction with customers for our new products. Woody will touch on this later in the call.

It is too early, however, to forecast activation rates for these products, which will be the primary driver of our new product revenue. Given the macroeconomic conditions and the nascence of our new product uptake, there are just too many variables for us to provide either revenue or earnings guidance at this time. Woody’s comments however, will provide you with some understanding of how we view the remainder of fiscal year 2009 and how we intend to manage the company in light of all of the uncertainty.

That completes my comments on the financial results and I’d now like to hand the call over to Woody for his remarks. Woody.

Woody Hobbs

Thank you, Rich. Good morning everyone and thank you for joining us on our conference call today. As Rich discussed at the beginning of this call, it is clear that we are in the midst of a once in a lifetime set of economic conditions. The global economy continue to deteriorate beyond anyone’s expectations in the December quarter, resulting in a sharp pullback in consumer and corporate spending, generating an industry wide weakness in end user demand for PCs. In consideration of these major challenges, I am very pleased that we’re reporting fiscal first quarter results that are flat with the same quarter last year.

Revenues generated in the quarter from our new products and particular from FailSafe, offset weaknesses in core system software sales. So at a time when most companies within the PC echo system are reporting year-over-year revenue declines, our ability to hold revenues constant is indicative of the traction being generated by our new products.

As many of you know, we are pursuing a market opportunity with our new products that is many times larger than that afforded us with core systems, also known as BIOS. To-date, our core systems business has been funding investments in our new business lines. Given the recession and its impact on the core business, we are now burning cash at a clearly unsustainable level to fund our product strategy. This needs to change and we are therefore implementing measures we believe to be prudent to enable us to reduce our cash burn and extend our cash flow.

Going forward, we will more closely match expected revenue to projected expenses. Part of this will be driven by revenue growth from contracts we’ve already signed. Part of it will come from an aggressive management of expenses. The latter will include initiatives to increase productivity and a pairing down of the use of external contractors who helped accelerate our time to market with the new products. It is appropriate to say that we’re looking across the entire organization and once we have implemented the necessary steps, we will be able to provide greater detail on our next call.

With market leading OEMs and ODMs signing up for our new products, we have tremendous confidence in our future prospects and we’ll continue to invest in key strategic opportunities. We feel we have very good prospects for all of our businesses.

Our new products are doing well and results are in line with our expectations. For example, HyperSpace was named Best Software by Laptop magazine and also won the coveted Readers Choice Award for 2009 at CES, which serves to highlight the receptivity Phoenix is receiving in the industry. In addition, a number of top tier press and industry influences have named HyperSpace as the product to look out for in 2009. Phoenix FailSafe won the Best New Product of the Year Award by Popular Science magazine.

More importantly, we have signed many new customers for both FailSafe and HyperSpace. Major new customers in the quarter included Lenovo, Samsung and a Fortune 100 PC OEM for FailSafe. Subsequent to the close of the quarter, we brought on ASUS, the fastest growing notebook brand to OEM HyperSpace.

What this means is, by our fourth fiscal quarter, we expect that 5 million to 15 million PCs will be shipped with either HyperSpace or FailSafe in them. While we can’t yet predict activation rates, we know that these shipments are going to generate significant revenues and profitability and start to offset weaknesses in our core revenues.

In the nearer term, there are other pockets of strength in our business; as Rich noted, the December quarter, with a total backlog of $48 million, equating to bookings of $27 million in the quarter. These are both very strong numbers given the current economic environment and especially when you bear in mind that the December quarter last year we shifted from one year contracts to two year contracts.

So generating $27 million in bookings this quarter is impressive, because it was achieved without the benefit of resigning those customers currently on two year contracts. Another pocket of strength is deferred revenue, which was sequentially flat at approximately $15 million. It underpins our performance in the March quarter.

To summarize, the economic environment remains challenging as we enter our March quarter, which typically reflects a small seasonal decline from the December quarter. Nevertheless, we are comfortable with our ability to manage cash flow and we will do so aggressively. We are very pleased with the way our new products are being received and the traction we are gaining with key customers, which is already converting into revenue. We remain extremely prudent with the business led by an experienced management team and an unwavering belief in the opportunity Phoenix’s new products afford us.

This concludes my prepared remarks. Operator, I’d like to open the call to questions.

Questions-and-Answers Session

Operator 1

(Operator Instructions) Your first question comes from Rich Kugele - Needham & Co.

Rich Kugele - Needham & Co

A few questions; I guess first, in terms of your place within the broader food chain, I believe that you intend to be actually a lagging indicator around broader PC units and so maybe a 6% year-over-year decline or sequential decline is not really the right way to look about it.

Do you think that the types of decline that we’ve seen from the other OEMs is something we should see maybe the balance in your decline in this upcoming quarter; is that the right way to think about it or do you think that the inventory within the supply chain of PCs both in finished and work-in-process is down enough where maybe it gets less than that type of decline where something with a two in front of it?

Woody Hobbs

I think that, if you’re thinking about OEMs, you certainly are right that there is a difference in our timing in the OEMs. However, our timing more closely matches Intel’s and AMD’s, because the chips are sold and the BIOS is put inside the computer and we’re both on somewhat the same kind of conditions in terms of revenue recognition. So, I don’t think you can match it exactly to the OEMs and I think Rich can enhance it from there.

Richard Arnold

I didn’t understand your 6% reference Rich.

Rich Kugele - Needham & Co

I was trying to draw just a correlation to how you actually did in the license side of the quarter and what happened in December ‘07 timeframe. That was about a 6% year-over-year decline if that’s a fair compare.

Richard Arnold

Yes, that’s a fair compare. Obviously, it’s confused by the way VPAs work and the sell through or otherwise on the VPA customers. The good news is that we don’t have major issues with customers who are shipping less than they’ve committed to in their VPAs. The bad news is that they are not as had previously been anticipated, shipping significantly above their original purchase forecast.

We got some installation provided by the two year VPAs that we entered into, but that’s probably not material and I know you’d like for me, in answering this question to give some kind of revenue guidance for the March quarter, but we are just going to be pretty religious about not giving guidance in times like this.

Rich Kugele - Needham & Co

That’s probably appropriate. I’m just wondering, in terms of broader units, if the PC industry is down, call it 15% in March; would you expect to also be down 15% or would it be something less than that or something more than that?

Richard Arnold

I think we continue to expect to outperform the rest of the industry Rich and one indicator you’ve got of the probability or potential of us doing that, is that though the March quarter is typically down sequentially from the December quarter, we are entering this March quarter with almost exactly the same deferred revenue backlog that we ended last March quarter with and the deferred revenue backlog is the best predictor of subsequent quarter revenue of any of the numbers that we release.

Rich Kugele - Needham & Co

Okay and then just to follow-up on Woody’s comments there on operating expenses and the ability to reduce costs, I understand you don’t want to preempt any restructuring, but can you give us a sense on how much you think you can actually reduce the structure and what the end game is? Are you aiming for if conditions remain at these levels all year; you’re cash flow neutral or what is the ultimate goal, so we have really some sense on how to model this?

Woody Hobbs

Yes, you can’t get to cash flow neutral instantly, but that would certainly be our goal over the years, to move in that direction and to give our revenues from new products a chance to catch up and exceed our expenses. We can’t give you an expense number exactly because we’re working on it and we just don’t want to get ahead of ourselves, but we’re going to be aggressive about it. I think Rich said on the last call that in addition to being growth guys, we love growth, we’re also turnaround guys and we know how to fix problems like this.

Rich Kugele - Needham & Co

Okay. Then just lastly on the HyperSpace side, without any revenue comments, can you give us any metrics that we can monitor the interest level; any general sense on the number of downloads to-date or how much has been the free trial versus purchased?

Woody Hobbs

Well, we haven’t initiated any sort of marketing activity that will generate significant volumes. The ASUS contract is one of the first ones that could generate leads in the millions and given the current economic climate, we’ve canceled our Super Bowl ad, so that will wreck our leads for it right there. So you have to spend money to get leads in significant numbers or you have to have a partner and our partner in this business is the OEMs.

Like I said, given the economic climate, the amount of advertising and another kind of lead generation we’ll be doing, would be minimal. So we’ve got to get the OEMs in gear to generate millions of leads and that will generate interesting and significant numbers and we’re signing them up left and right. We’re happy with our signups.

Richard Arnold

The other thing I would say Rich is, when there is data that would be useful to people to help them to project revenue, we will figure out what the right set of metrics are and will attempt to begin providing it.

However, we are cautious about making any commitment to sort of granular forecasting elements and particularly to product level revenue guidance and so the simple truth is there is not yet enough data and therefore it doesn’t make sense for me to provide you any data. Once there is data, then I will translate that guidance at least into our top line revenue guidance, but not necessarily into product level metric disclosure.

Operator

Your next question comes from Nathan Schneiderman - Roth Capital Partners.

Nathan Schneiderman - Roth Capital Partners

Once again, on the issue of revenue and how to think about that going forward in the near term; Woody, you made a comment that you historically have seen some small seasonality, sequential declines, Q-over-Q and then Rich you made a comment as well that looking at the deferred revenue, it’s the best indicator.

I just wanted to clarify here and try to understand; a lot of the other players in the industry are talking about the impact of draw downs in inventory and suggesting that maybe you’d experience more of the draw down in the March quarter than you experienced in the December quarter. So I was just trying to understand how you expect that to skew traditional seasonality that you’ve seen or do you feel like there’s enough in deferred revenue that you would have a fairly typical seasonal pattern?

Richard Arnold

Nate, we just don’t know. If we had sufficient confidence or visibility of what the entire economic slowdown is doing, we would be giving guidance, but now is not a time when people can give that guidance with that confidence.

The good news is we have the VPA contract. The good news is customers, in anticipation of their future shipments, have not only entered into committed orders with us, but have given us the cash to pay for it and hence are sitting on our balance sheet as deferred revenue. That gives one greater confidence in our next quarter than other companies might have in theirs, but it’s not enough to lead us to predict a specific number.

Woody Hobbs

Because of the VPAs we have the opportunity of gaining market share in these quarters as the ODMs in Taiwan give us orders in order to meet their volume commitments and take them away from our competitors. The other thing that can happen and will happen is as we said before; some of this quarter’s revenues come from new products and so hopefully we’ll continue to grow those new revenues. So while BIOS revenues might decline a little bit, they might not due to offsets from competitors and in any case we’ve got new products coming online.

Nathan Schneiderman - Roth Capital Partners

Woody, one of the comments you made was that some of the pressure in core system software was offset by revenue lift from FailSafe. Can you clarify? I don’t know if you’re willing to talk to the dollar amount of contribution from FailSafe, but could to at least… I’m sorry?

Woody Hobbs

As Rich said we’re not going to do segment report.

Nathan Schneiderman - Roth Capital Partners

Could you at least clarify which particular revenue line items enjoyed lift from FailSafe? Was it simply the subscription revenue or was it elsewhere?

Woody Hobbs

It’s both license revenue and service revenue.

Nathan Schneiderman - Roth Capital Partners

And can you clarify; what are the preconditions that caused the FailSafe to appear in license fees as opposed to the other lines? What sort of arrangements result in license fees from FailSafe?

Woody Hobbs

Any number that is in license fees is not a professional service, nor is it a subscription service meaning month-by-month. The easiest example of a subscription service is our eSupport product, which we sell an annual license to and then recognize revenues monthly or quarterly for it. The easiest example of license revenue is the co-op system, which we get anywhere from $1 more or less for BIOS and Professional Services, just people delivering customization services.

Nathan Schneiderman - Roth Capital Partners

One question for you on VPA contracts; has it become much more challenging to get your customers to sign to two year VPAs or are you seeing a mix shift towards one year quarterly and to what extent?

Richard Arnold

No, it differs from customer to customer Nate. Last year there was a conscious strategy on our part, which by the way in retrospect I would say has turned out to be very smart, to extend out to two-year VPAs, which was done for several reasons.

From the OEM prospective, it was an opportunity to increase their aggregate commitment to us, which in their view helped them to negotiate the best possible pricing. From our prospective, it provided us with insulation against the risk of loss of customer base during the transition to the Montevina platform and also to extend the length of the commitment at a fixed price and therefore minimize the ASP degradation that could occur if we were renegotiating ever year.

Now, we don’t have particularly the Montevina issue now and customers are a little less willing to make macro commitments in an economic environment like this. So the negotiations this year, we consider to have been extremely successful as evidenced by the fact that we booked $17 million in new business in a quarter when our revenues were only $15 million. So that’s almost a two to one book-to-bill ratio and that is a great outcome by our sales force. It’s mostly one year VPAs, although some of them are things like 18 months; they might the life of a project, life of a product line kind of deals, but they vary.

Operator

Your next question comes from Joe Maxa - Dougherty & Co.

Joe Maxa - Dougherty & Co.

Thank you. Woody, you mentioned 5 million to 15 million mobile PCs with FailSafe or HyperSpace within the next per say by fiscal Q4. Were you talking ASUS specifically or was that all PCs?

Woody Hobbs

All.

Joe Maxa - Dougherty & Co.

All PCs, okay. Can you talk a little bit more about where you perceive the HyperSpace being used? Is it traditional higher end PCs or Netbooks? I’m certainly it’s probably both, but what do you think is going to be the first area to have success?

Woody Hobbs

Yes, I think there is kind of four different use cases in a general sense without getting into consumer types. The hybrid that is kind of a high end laptop for somebody and as a laptop it’s virtualized and supports both Windows and HyperSpace simultaneously and bounce back freely, so that’s kind of the high end.

To go to the other stream, the low end, the Netbook, it’s something that only has HyperSpace installed in it and there’s probably no Windows and so in that context, on a Netbook, we might be competitive.

Then you get into the dual options kind of in the middle where somebody is primarily using HyperSpace because they use, like my daughter, Facebook all day and rarely need to bounce over to Windows, where somebody else maybe 50-50 or a little more uses Windows and uses the dual option much more frequently to get into Windows.

So, that’s kind of the range. It’s the full range from the really low end inexpensive Netbooks, all the way up to the top where full Windows Vista is installed and we’re there just as a productivity tool.

Joe Maxa - Dougherty & Co.

So what are you seeing today? Do you think this is going to be used more in the high end or the low end or midrange initially with ASUS or whoever else may be using it? Where do they want to put it first?

Woody Hobbs

Well, I think ASUS is more initially a low end vendor, but they actually, as far as I know, plan to do it in all of those use cases and they’ve got models all along the line that they’re going to put it into. So I think the answer is, while it’s not yet completely decided, as far as we know, they plan to put it in all those use cases.

Joe Maxa - Dougherty & Co.

Okay. Then I just want to talk about pricing of it, because to me and I could be way off, but if someone was looking at a low end Netbook for $300 or less, I mean are they going to be willing to pay $40 a year? What kind of studies have you done to come up with that pricing I guess I would look at?

Woody Hobbs

Well, we know that the value of a Netbook is instant on and instantly connected and easily connected and therefore we believe we’re providing significant values. There’ve been studies done that show that consumers are willing to pay at least $100 a year to have those features and then in addition, it depends on the Netbook and the development of it, how it was developed, but we would also expect to have significant power savings.

So we just feel like we’ve got some of the key features that people want in a Netbook when they are browsing. If they need Windows primarily, then that is a different use case but we believe we’ve got the right product and we’re going to be doing a lot of updating to the environment and increasing the capabilities, so our price is more a target price for a product you don’t yet see. We’re going to be adding things to it that enhance the ability and make it more of a stand alone product. We didn’t want to keep changing the price or forcing users to pay for updates or any of those kinds of things.

So the price may seem a little high; we don’t think it is. We think that individual productivity will justify it, but as we start to complete the product over the next quarter and maybe even two quarters, you’ll start to see that the price is more reasonable than you originally thought.

Joe Maxa - Dougherty & Co.

And then lastly on the HyperSpace issue, will you be expecting to see more license sales or more of this kind of a blend degree of a revenue share. What is it looking like so far?

Woody Hobbs

I think we would expect revenue share. That’s where we’re going to get our leads from.

Joe Maxa - Dougherty & Co.

Okay. Then Rich, do you have any organic growth number for us?

Woody Hobbs

(Multiple Speakers) ...OEMs that’ll also be independent software vendors that we share with as well.

Joe Maxa - Dougherty & Co.

I see. Rich, I was going to ask; do you have an organic growth number for us for the quarter?

Richard Arnold

Organic growth member? I’m sorry. I don’t understand what you mean.

Joe Maxa - Dougherty & Co.

Organic revenue growth rates, backing off acquisitions you made during the last 12 months?

Richard Arnold

No, because we don’t provide product level revenue.

Operator

Your next question comes from Eric Martinuzzi - Craig-Hallum.

Eric Martinuzzi - Craig-Hallum

The cash burn in the quarter was $6 million cash from ops and the free cash flow after you backed out the CapEx was $7.3 million. Given your outlook for a sequential decline, is there any reason why the cash burn would be less than it was in Q1? In other words, $7 million burn in Q1 could become $5 million or $6 million in Q2?

Richard Arnold

We’re not providing either revenue or earnings guidance, Eric. We are doing our expense management planning now. So, it is not yet time for us to be giving you any guidance of what we expect as a result of it. So if we can’t give you revenue guidance and if we can’t give you expense guidance, it’s pretty hard for us to give you net cash flow guidance. We are very conscious of the cash flow issues and we will manage it, but it’s going to be our next call before you’ve got good inputs from us on it.

Eric Martinuzzi - Craig-Hallum

Okay, and was there a foreign exchange, a foreign currency impact for you guys in the December quarter?

Richard Arnold

Not that was significant, no.

Eric Martinuzzi - Craig-Hallum

Okay and one last question on the ASUS relationship. It’s NoteBooks and its HyperSpace; ASUS is one of the fastest growing notebook vendors because of their Netbook business. Do you guys have a footprint on either the BIOS or the HyperSpace on the Netbook side of ASUS?

Woody Hobbs

Well, we will have in the future; we don’t have it right now.

Eric Martinuzzi - Craig-Hallum

Can you clarify that?

Woody Hobbs

Not yet.

Operator

Your next question comes from Brian Horey - Aurelian.

Brian Horey – Aurelian

Can you characterize at all, what kinds of laptops FailSafe is being paired with in terms of where in the product line of a vendor they might sit? Are they primarily at the high end or throughout the line?

Woody Hobbs

No, they fit throughout the line, but many of our initial deployments will be more oriented towards the consumer side of the business rather than the corporate or enterprise part of the business, which fortunately for us right now is the stronger part of the industry.

Brian Horey – Aurelian

Okay, and Rich, can you give us a sense as to in the deferred revenue line, how much of that is subscription related?

Richard Arnold

Actually, that’s a very good question which I hadn’t anticipated Brian. I can’t on this call, but I will undertake to do a little analysis of that and if it is meaningful, then I will be that much more granular about our deferred revenue numbers in the future. It’s a great question.

Operator

Your next question comes from [Steve Basmeets - Sigma Labs Inc.]

Steve Basmeets - Sigma Labs Inc

I have a question for the shareholders. The price naturally is not very good, but that’s the whole industry. I have a question here; so considering on saving cash that the management team is taking actually cash reductions in their compensation against maybe the stock and there could be gains in future quarters, so that there is an equal hit on the people in the company as to shareholders?

Woody Hobbs

Certainly variable comp is down, but we submitted a stock plan to shareholders a year ago, which was approved with the understanding that we would not immediately turn around and issue more stock to management. So we really don’t feel like that option is open to us.

Steve Basmeets - Sigma Labs Inc

Okay, and the other thing is, what do you anticipate is the take-up rate of your new products? The HyperSpace is very new and the FailSafe is already introduced a couple of quarters. To get to the level thank you really like, is that kind of a number of a year out or are you looking actually this current fiscal year that you see significant changes in revenue from that?

Woody Hobbs

If the economy does not completely disrupt our schedules we ought to have some pretty significant revenues in the fourth quarter, but we have to now be more conservative than that and so it might slip into early next fiscal year, which for us would be the fourth quarter of calendar year or maybe the first quarter of the next year.

Operator

Your next question comes from Paul Hill - PMH Capital.

Paul Hill - PMH Capital

I just wanted a bit of clarification on just a couple of restructuring issues in licensing or the turnaround opportunities. Just firstly on the tax side, is there any way of structuring the business such that; obviously it is loss making at the moment, but it doesn’t pay tax and whether that can change going forward?

Then really on a more sort of like top level macro view, the business obviously has got $30 million of cash, generating sort of gross profit of $60 million a year and if you just run those basic numbers through and that’s really excluding the sort of the beneficial effect potentially of the tax losses brought forward and obviously the great technology.

You can see that the external investors would perhaps value this business significantly higher than the current share price and therefore really whether the board has any view in relation to strategic reviews, not just the turnaround side but also of a more generalist approach. They are really the first two questions?

Richard Arnold

This is Rich; let me just give a comment on the tech side. This company has a couple of significant things in respect with tax. One is it has substantial tax attributes in the United States that will give it a very low tax rate for a significant period of time to come in terms of U.S. taxes. However, our principle tax expense is in Taiwan, where many of our customers and particularly the ODMs live and where this company has for a long time had a running dispute and indeed negotiation with the Taiwanese tax authorities.

So, we have a fairly sizable accrued tax liability and we continue to accrue incremental taxes at a rate which runs of the order of magnitude of 8% to 10% of top line revenue, which is an extraordinarily high number, particularly during loss making periods and management is working hard and spending quite a bit of money and trying to resolve that issue. I didn’t understand the second half of your question.

Paul Hill - PMH Capital

Just in relation to the tax, it isn’t a cash expense at the moment; it’s more of a bookkeeping expense?

Richard Arnold

That’s correct.

Paul Hill - PMH Capital

Then just in relation to the strategic review or potential strategic view, say just running the numbers, sort of a cash position of $30 million, gross profit of $60 million, if you did the two times multiple amount, you’d get $120 million combined obviously. It would give you an EV of about $150 million and I guess the stock price is currently residing around about sort of $3 a share. There seems to be obviously a gap between the intrinsic worth of the business and the market value being ascribed.

Woody Hobbs

Well our view, as reflected by our comments for the last 2.5 years, is that the value of this business resides in the new product opportunity and the extraordinarily large target market that those products open us up to and it is management’s view and the board’s that any sort of effort to harvest through a strategic transaction would be way premature, given that those products are just now coming to fruition.

Paul Hill - PMH Capital

So there’s no near term per say, potential opportunities for releasing shareholder value?

Richard Arnold

It depends on what you call near term. The shareholder value is going to be reflected over the next year as these products come to market and the activation rates start to become evident.

Operator

Thank you, sir. There are no further questions. Please continue with any other points you wish to raise.

Woody Hobbs

Okay, well thank you all for your time and we’ll speak with you again next quarter. Bye-bye.

Operator

Ladies and gentlemen, this concludes the Phoenix Technologies first quarter fiscal year 2009 earnings conference call. Thank you for participating. You may now disconnect.

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Comments

[PTEC Watcher:]

Despite the industry-wide weakness in end-user demand for PCs during the December quarter and aggressive inventory reductions in the global PC supply chain, Phoenix Technologies actually saw revenue growth from its new products and services that were sufficient to offset declines in the company’s core system revenues and resulted in total revenues that were level with those reported in the year-ago period. This is quite different from many other major participants in the PC industry, which have reported substantial year-over-year revenue declines.


(HyperSpace won LapTop Magazine’s CES 2009 Readers’ Choice Award.)
www.laptopmag.com/revi...



Phoenix President and CEO Woody Hobbs is also confident about the company’s ability to weather these economic times.


"We remained committed to our previously stated intentions to support our new products and are encouraged by the favorable reaction of our major customers to both FailSafe and HyperSpace, and by the significant new customer agreements signed for each of these products.” Hobbs said. “Furthermore, we are extremely pleased with the positive feedback we have received from industry analysts and the general press following the successful launch of our consumer versions of HyperSpace at CES earlier this month, where it won the coveted CES 'Readers' Choice' award. More importantly, we recently announced the signing of an OEM agreement with the fastest growing notebook brand, ASUS, to incorporate HyperSpace into its next-generation notebooks.”

Jan 27 06:42 PM